Topics in Middle Eastern and North African Economies

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We attempt in this paper to estimate the impact of the endowment of natural resources, particularly oil rent, as well as the impact of the quality of institutions, on the level of public spending in Algeria. Our purpose is to test, by the application of an econometric estimation (OLS and 2SLS), the significance of the variable oil rent and the variables indicating the institutional quality of public expenditure management. Moreover, it was interesting to add the interaction term between rent and the variables indicating the quality of the institutions to see the indirect and common effect on the dependent variable. The results of the estimation show that the impact of natural rent is greater than the impact of oil rent on both components of public spending: equipment expenses and operational expenses. Thus, we see that there is no proportional relationship between rent and public spending. In regards of the institutional quality, the results show that the budgetary procedures lack transparency with the presence of rent, because the benefits related to the exercise of power are more important, which encourage politicians to manipulate the composition of public expenditure to maximize their likelihood to make decisions. This result is argued by the positive relation between spending and respectively the level of financial risk, and the level of economic risk. Positive relationship between public spending and the measure of political risk shows that the current government increases spending to avoid conflicts and manifestations of the population. However, the interaction effect between rent and institutional quality measures on spending is negative, indicating that the presence of rent in less democrat countries like Algeria increases expenditure. This indicates that the positive public spending effects diminish as institutional quality improves

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Topics in Middle Eastern and North African Economies




Middle East Economic Association and Loyola University Chicago






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